Question

) and T500 under the Required: 1. Using Exhibit 6-13 as a guide, compute the product margins for the B300 and T500 un company's traditional costing system. 2. Using Exhibit 6-11 as a guide, compute the product margins for B300 and T500 activity-based costing system. 3. Using Exhibit 6-14 as a guide, prepare a quantitative comparison of the traditional and based cost assignments. Explain why the traditional and activity-based cost assignments dire PROBLEM 6-17 Comparing Traditional and Activity-Based Product Margins (L06-1, L06-3, L06-4.LOS Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder concerning these two product lines appear below: Xtreme Selling price per unit .......... Direct materials per unit....... Direct labor per unit.. Direct labor-hours per unit ........ Estimated annual production and sales ......... $140.00 $72.00 $24.00 2.0 DLHS 20,000 units Pathfinder $99.00 $53.00 $12.00 1.0 DLHS 80.000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-bours for the upcoming year appear below: Estimated total manufacturing overhead ............ $1,980,000 Estimated total direct labor-hours .. . 120.000 DLHS Required: 1. Using Exhibit 6-13 as a guide, compute the product margins for the Xtreme and the Path finder products under the company's traditional costing system. 2. The company is considering replacing its traditional costing system with an activity based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs Expected Activity Estimated Activities (and Activity Measures) Overhead Cost Xtreme Pathfinder Total Supporting direct labor (direct labor-hours).... $ 783,600 4 0,000 80.000 120,000 Batch setups (setups) .......... 495.000 200 100 300 Product sustaining (number of products)...... 602.400 2 Other 99,000 NA NA Total manufacturing overhead cost............ $1,980,000

Answer 1

Solution 1:

Overhead Allocation - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Estimated annual Production (In units)	20000	80000
Direct Labour Hours Per unit	2	1
Total Direct Labour Hours	40000	80000	120000
Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model)	$660,000.00	$1,320,000.00	$1,980,000.00
Manufacturing overhead cost per unit (Allocated Overhead / Nos of units)	$33.00	$16.50

Computation of Product Margin - Traditional Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$140.00	$99.00
Direct material per unit	$72.00	$53.00
Direct labor per unit	$24.00	$12.00
Manufacturing overhead cost per unit	$33.00	$16.50
Product Margin per unit	$11.00	$17.50
Nos of units sold	20000	80000
Total Margin (Product margin per unit * Nos of unit sold)	$220,000.00	$1,400,000.00	$1,620,000.00

Solution 2:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Xtreme		Pathfinder
					Usage	Allocated Costs	Usage	Allocated Costs
Supporting direct labor cost	$783,600.00	Direct Labor hours	120000	$6.53	40000	$261,200.00	80000	$522,400.00
Batch Setups	$495,000.00	Setups	300	$1,650.00	200	$330,000.00	100	$165,000.00
Product sustaining	$602,400.00	Number of products	2	$301,200.00	1	$301,200.00	1	$301,200.00
Other	$99,000.00	No allocation
Total	$1,980,000.00					$892,400.00		$988,600.00
Nos of units						20000		80000
Allocated overhead per unit						$44.62		$12.36

Computation of Product Margin - Activity based Costing System
Particulars	Xtreme	Pathfinder	Total
Selling price per unit	$140.00	$99.00
Direct material per unit	$72.00	$53.00
Direct labor per unit	$24.00	$12.00
Allocated Manufacturing overhead cost per unit	$44.62	$12.36
Product Margin per unit	-$0.62	$21.64
Nos of units sold	20000	80000
Total Margin (Product margin per unit * Nos of unit sold)	-$12,400.00	$1,731,400.00	$1,719,000.00

Solution 3:

Quantity comparison of traditional cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Material Cost	$1,440,000.00	25.4%	$4,240,000.00	74.6%	$5,680,000.00
Direct Labor Cost	$480,000.00	33.3%	$960,000.00	66.7%	$1,440,000.00
Manufacturing Overhead cost	$660,000.00	33.3%	$1,320,000.00	66.7%	$1,980,000.00
Total Cost assigned to Product	$2,580,000.00		$6,520,000.00		$9,100,000.00

Quantity comparison of Activity Based cost assignment
Particulars	Xtreme		Pathfinder		Total
	Amount	% of total Amount	Amount	% of total Amount	Amount
Direct Cost:
Direct Material Cost	$1,440,000.00	25.4%	$4,240,000.00	74.6%	$5,680,000.00
Direct Labor Cost	$480,000.00	33.3%	$960,000.00	66.7%	$1,440,000.00
Indirect Cost:
Supporting direct labor cost	$261,200.00	33.3%	$522,400.00	66.7%	$783,600.00
Batch Setups	$330,000.00	66.7%	$165,000.00	33.3%	$495,000.00
Product sustaining	$301,200.00	50.0%	$301,200.00	50.0%	$602,400.00
Total Cost Assigned to Products	$2,812,400.00		$6,188,600.00		$9,001,000.00
Cost not assigned to products:
Others					$99,000.00
Total Cost					$9,100,000.00